Peer-to-peer lending: Case for light regulation

The RBI’s proposal to regulate peer-to-peer (P2P) lending, in which online platforms connect borrowers to people with money to lend for a fee that covers services like preliminary credit worthiness profiling, repayment and recovery facilitation, is welcome.

Light-touch regulation is warranted to enable an orderly growth of the nascent sector.

It will help P2P startups, numbering about 30 now, to increase their customer base, deliver credit to small and medium industries and sectors of the economy that do not have access to formal finance.

Some additional competition to banks, non-banking financial companies (NBFCs), microfinance and traditional moneylenders is welcome. But it should be regulated: missing regulation in China led to largest P2P lender Ezubao turning insolvent after it was alleged to have run a Ponzi scheme. RBI supervision is sensible, even if P2P platforms do not pose any systemic risk.

The only apparent reason why the RBI wants to regulate P2P operators as NBFCs is expedience: the RBI Act would not need to be amended to recognise a new category of financial intermediary. But this is not good enough. Unlike an NBFC, a P2P platform does not take the money that is lent on to its books. It cannot accept deposits or promise assured returns directly or indirectly.

It merely credibly introduces the lender and the borrower, and facilitates recovery. Credit moves directly from the lender’s bank account to the borrower’s. Applying norms similar to those for NBFCs - a minimum capital requirement, limit on leverage and having personnel with a background in finance - is, therefore, illogical. The case for prudential limits on the maximum contribution by the lender to a borrower or segment of activity is, however, compelling, given the poor level of financial literacy in India.

Fit and proper criteria for promoters, directors and CEO are in order, as is a brick-and-mortar presence in India for the P2P platform. A system of data sharing with banks and the credit information bureau is desirable, with complementary laws on data protection.

This piece appeared as an editorial opinion in the print edition of The Economic Times.